Russell Investments’ 2019 Global Market Outlook:
Strategist sees consumption, crude oil & competitiveness as the three keys to Canada’s market outlook in 2019
- Expects Canadian economy to grow near 2% in 2019
- Remains slightly positive on Canadian equities, especially relative to U.S. equities
- Anticipates increasing U.S. recession risk on the 2020 horizon
TORONTO, December 6, 2018 — Russell Investments has released its 2019 Global Market Outlook, offering economic insights and market forecasts from its global team of multi-asset investment strategists.
While the Canadian economy is expected to grow in line with central bank estimates of 2% in 2019, Russell Investments’ strategists believe there are reasons to be cautious. In the “Canada Outlook” segment of the report, Shailesh Kshatriya, director, investment strategies at Russell Investments Canada Limited, explains that while growth is expected to be respectable, the potentially higher prospects for a recession in 2020 will make 2019 a wildcard for financial markets.
“Consumption, crude oil and competitiveness are key themes that will shape the outlook for the Canadian economy in 2019 and several years thereafter,” Kshatriya said. “Both personal consumption, which is highly correlated to slowing housing trends, and crude oil, which has become increasingly volatile due to domestic pipeline constraints, will have an almost immediate moderating impact on growth prospects for 2019.”
Regarding Canadian competitiveness in the global market, Kshatriya added that the recently announced Fall fiscal update from the federal government specifically aims to address this point through tax breaks for businesses and other measures, but in his view that is merely a start.
“Assessing the market outlook for Canadian equities in 2019, there is value, however unlocking it will require a change in sentiment away from those factors that dominated returns in 2018; so long as oil prices cooperate,” Kshatriya said. “As such, we are slightly positive on Canadian equities, especially relative to U.S. equities, due to the sizeable valuation and yield advantage.”
Global forecast overview
Looking globally, Russell Investments’ strategists believe 2019 will feature volatile equity markets that deliver mid-single-digit returns, with better potential in Europe and Japan than the U.S. The team has an underweight preference for U.S. equities, mostly driven by expensive valuations. They see the market cycle as broadly neutral at year-end 2018, but likely to be under downward pressure later in 2019. The sell-off in late 2018 has triggered some contrarian oversold signals, so the team sees scope for a tactical bounce. The strategists expect the U.S. Federal Reserve (the Fed) to follow its December rate rise with three to four additional hikes in 2019, which they believe will probably lead to an inversion of the U.S. Treasury yield curve.
Other views covered in the report include:
- U.S. market: An important reason for the strength in the U.S. economy and corporate earnings in 2018 has been the Trump administration’s fiscal stimulus. The strategists believe that the peak economic boost from the fiscal stimulus will last into early 2019, before it becomes a drag on the economy in 2020. The current U.S. expansion will become the longest on record if it continues to July 2019, which the strategists see as likely. That said, the team believes U.S. GDP and profits growth will slow, while inflation pressures build.
- Eurozone: In eurozone equity markets, Russell Investments’ strategists (the strategists) expect 8% growth in earnings per share in 2019. To achieve that profit increase, eurozone gross domestic product (GDP) growth needs to stay at or slightly above the long-run potential of around 1.5%, which the team thinks is very achievable. The main risks to the benign cycle view are the budget conflict between Italy and the European Union, a disorderly Brexit and an escalation of the global trade war. The team’s base case is for these three risks to fade during the course of 2019.
- Asia-Pacific: Regarding Asia Pacific, the strategists foresee another solid year. They expect emerging Asia to deliver over 10% in earnings growth, while they view Japan as well-placed to exceed modest industry consensus expectations. Across the region, the strategists find valuations as fair to attractive. Japanese and Chinese equities stand out to the team as attractive, while Australian equities are close to fair.
- Fixed Income: The strategists favor the value offered by U.S. Treasuries with a predicted fair-value yield of 2.7% for the U.S. 10-year bond. They see German, Japanese and UK bonds as very expensive, with yields well below fair-value. The cycle is seen as a headwind for all bond markets as inflation pressures build and central banks tighten further, such as the Fed and Bank of England, or move away from extreme stimulus, such as the European Central Bank and Bank of Japan (BOJ). High yield credit is expensive and losing cycle support, as is typical late in the cycle, when profit growth slows and there are concerns about defaults.
- Currencies: The Japanese yen is the team’s preferred currency as 2018 ends. They see the euro and British sterling as undervalued, with the recovery in European economic indicators and a potential Brexit deal providing tailwinds. The team also believes the U.S. dollar has modest upside potential in 2019.
About Russell Investments Canada Limited
Russell Investments Canada Limited is a wholly owned subsidiary of Russell Investments Group, Ltd. Established in 1985, Russell Investments Canada Limited has its head office in Toronto.
About Russell Investments
With more than 80 years of experience, Russell Investments is a global investment manager, dedicated to helping investors reach their long-term goals. Russell Investments offers investment solutions in 31 countries, manages C$381.4 billion in assets (as of June 30, 2018) and provides consulting services on US$2.3 trillion in assets (as of Dec. 31, 2017). Russell Investments specializes in multi-asset solutions, scouring the globe to deliver the best investment strategies, managers and asset classes to its clients around the world.
Headquartered in Seattle, Washington, Russell Investments operates globally with 21 offices, providing investment services in the world’s major financial centers such as New York, London, Tokyo and Shanghai. For more information about how Russell Investments helps to improve financial security for people, visit russellinvestments.com/ca.
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